Johnson Announces Capital Changes; RegFlex Would Kick in at 7%, Corporates Would Get Risk-Based Capital

ALEXANDRIA, Va. – Just three days after NCUA held its Summit on Credit Union Capital, NCUA Chairman JoAnn Johnson jumped into action by announcing three key initiatives related to capital. The first item she is recommending is that credit unions qualify for RegFlex at 7% net worth rather than the current 9%. This had been an issue with a number of people in the credit union community, including then-NCUA Board Member Yolanda Wheat. However, RegFlex sponsor, then-Chairman Dennis Dollar, stuck to his guns on the 9% level. Johnson also said that highly rated, low-income credit unions should have the option to release the portion of a secondary capital account that no longer counts as net-worth. Once secondary capital reaches five years to maturity or less, each year 20% is discounted from what can be considered toward net worth but the credit union still has to hold that 20% (and the next year 40% and on up) as debt. The National Federation of Community Development Credit Unions argued for this change during the capital summit. Additionally, Johnson said the agency will pursue a risk-based system of capital for corporate credit unions. This was a key point of presenters for the Association of Corporate Credit Union and others during the summit. “While we all recognize that moving to a risk-based capital system for all natural person credit unions will require a statutory change, these are three areas where it may be possible to make improvements in credit union capital without the need for legislative change,” Johnson said. She has already directed agency staff to begin reviewing the current regulations and drafting a proposed rule, but would not say when a proposal might be coming out. “I have had some initial meetings with them and had very positive feedback on their willingness to pursue these areas,” Johnson said. Johnson said all three of these are strong moves in the right direction to show Congress NCUA is serious about risk-based capital and should help the chances of the Credit Union Regulatory Improvements Act (H.R. 3579). ACCU Executive Director Mike Canning commented, “We feel the risk-based capital system will actually improve the safety and soundness of corporates.” It actually “incentivizes” conservative behavior, he said. He explained that the corporates experienced the same problems natural person credit unions did during the `flight to safety.’ Ten corporates over the last two years got into trouble with the 2% RUDE (reserves and undivided earnings) leverage ratio and had to begin reserving, according to Canning. “We look forward to working through the details of this massive undertaking over the next few months,” he said. Corporate One FCU President/CEO Lee Butke, who testified at the Capital Summit, said moving to risk-based capital isn’t about lowering capital standards, it’s about using an approach that isn’t one size fits all. He said with everything weighed at 100% right now, it’s hard to determine risk and how much capital a credit union should have. “This is about trying to find the right amount of capital that permits us a better balance from what regulatorily we need for safety and soundness and what us as true cooperatives need to return value to credit unions,” said Butke. NFCDCU Executive Director Cliff Rosenthal said he was pleased to see Chairman Johnson move so promptly on the capital issues. He said that under the current system for low-income credit unions, the credit union is disadvantaged when it has to begin counting the secondary capital as debt and should be able to unload it. Conversely, the social investor, typically a philanthropic organization, no longer achieves its goal of strengthening the credit union. Initially, Rosenthal said the 20% discounting was intended to encourage low-income credit unions to raise primary capital, but he said, this could be achieved by returning the 20% as well. He added that he was very disappointed that the Government Accounting Office’s study considered low-income credit unions’ experience with secondary capital not broad enough for all credit unions. “The [proposal] that had the most immediate potential was the one with small credit unions,” NCUA Board Member Debbie Matz said. She added that she had spoken with NCUA Office of Corporate Credit Union Director Kent Buckham about the risk-based system for corporates and he recommended to her that if a risk-based system were implemented, it should be in combination with a system for interest rate risk. Johnson’s initiative on RegFlex, Matz said, may be “jumping the gun.” She suggested that, though she is not necessarily opposed to it, maybe NCUA should wait for Congress to lower credit unions’ leverage ratios before the agency went ahead. She noted that she was not consulted on Johnson’s proposal and she was “reserving judgement.” However, CUNA and NAFCU offered ringing endorsements. “CUNA strongly supports the use of risk-based net worth under prompt corrective action, including for corporate credit unions,” CUNA President and CEO Dan Mica said. “We believe this is a positive announcement today and look forward to working with NCUA as it continues to review these issues. In the meantime, we urge NCUA to continue working with us and the credit union system to develop meaningful PCA reform for all credit unions, including natural person, community development, low-income and corporate credit unions.” NAFCU Director of Regulatory Affairs Gwen Baker added, “We certainly appreciated the chairman’s intention of putting these proposed changes before the board and thank her and board member Matz again for the opportunity to participate in the capital summit. NAFCU has advocated 7% as the appropriate threshold for RegFlex from the time the regulation was first proposed, and we strongly support risk-based capital for corporate credit unions as well as the pursuit of changes that will assist low-income credit union in serving their members.” NASCUS President and CEO Mary Martha Fortney pointed out that the majority of RegFlex does not apply to state charters so that provision would not affect them much. However, she noted, “The state regulators have a history of prudently executing RegFlex for state charters.” On the low-income-related proposal, Fortney said, “We support the NCUA’s movement to allow low-income credit unions to manage their own capital.” She also emphasized that NASCUS encourages the “return” of risk-based capital for corporate credit unions. [email protected] (Editor Paul Gentile contributed to this story.)